The Basics of Supply

The Basics of Supply

Like demand, the word supply has a specific meaning in economics.

Supply refers to the willingness and ability of sellers to produce a good or service

Willingness: a person wants or desires to produce and sell the good

Ability: a person is capable of producing and selling the good

The Law of Supply

The law of supply-quantity supplied varies positively (or directly) with price, other things constant.

Price = quantity supplied

Price = quantity supplied

Why are price and quantity supplied positively (directly) related?

According to economists it is because of the Profit motive.

Producers are more willing and able to supply more goods at higher prices than at low prices because a higher price makes production more profitable

Profit = Total Revenue – Total Cost

How We Look at Supply -- The Supply Schedule and Curve

A schedule is a table that lists the quantity of a good that a producer is willing to make at each price. This is the STORY.

The vertical axis ALWAYS shows price

The horizontal axis ALWAYS shows quantity supplied

Plot the points on the schedule

Connect the dots!!

The Supply curve slopes UP.

Now you have created a PICTURE OF THE STORY.

S

Q

P

Movement Along a Supply Curve

A change in the price is a change in the quantity provided, other things constant.

This causes a movement along a supply curve.

Change in Quantity SuppliedPrice

Quantity

On to … Determinants of Supply

DETERMINANTS OF SUPPLY

Factors That Can Shift the Supply Curve:

Changes in . . .

– The cost of resources used to make the good– Technology used to make the good– Producers’ price expectations– Producers’ expectations of the costs of resources– The number of sellers in the market (competition)

Practice Problem #1

What would happen to the supply of pizza if more businesses enter the pizza market?

Determinant? Increase or decrease in supply?

Answer to Practice Problem #1

What would happen to the supply of pizza if more businesses enter the pizza market?

Determinant – more sellers in the market place (competition)

Increase in supply

Practice Problem #2

What would happen to the supply of Nike shoes if there is an increase in the cost of rubber?

Determinant?Increase or decrease in supply?

Answer to Practice Problem #2

What would happen to the supply of Nike shoes if there is an increase in the cost of rubber?

Determinant –The cost of resources used

to make the good Decrease in supply

Practice Problem #3

A new technology is invented that allows factories to produce energy drinks more efficiently.

Determinant? Increase or decrease in supply?

Answer to Practice Problem #3

A new technology is invented that allows factories to produce energy drinks more efficiently.

Determinant – Improved technology used to make the good

Increase in supply

Practice Problem # 4

A company that makes video games pays their workers the minimum wage. The government passes a law that increases the minimum wage businesses can pay workers.

Determinant? Increase or decrease in supply?

Practice Problem # 4

A company that makes video games pays their workers the minimum wage. The government passes a law that increases the minimum wage businesses can pay workers.

Determinant – the cost of resources to make the goods

Decrease in supply of video games

Practice Problem # 5

A computer company finds out a competitor is planning to sell a new and improved type of computer.

Determinant? Increase or decrease in supply?

Answer to Practice Problem # 5

A computer company finds out a competitor is planning to sell a new and improved type of computer.

Determinant – technology or producers’ price expectations

Increase in supply now because competition will likely lower prices later

Movement Along a Supply Curve Versus a Shift of the Curve Remember there is a difference between quantity

supplied (Qs) and supply (S).

Markets never stand still, there are always outside factors that change the actual price of the good or how much is supplied altogether.

A change in price creates a change in the quantity supplied (Qs), other things constant. – This causes a movement along the supply curve.

A change in one of the determinants of supply causes a change in supply (S).– This causes in a shift of the supply curve.

Determinants of increased supply change the story….. How so?

Quantity supplied of pizza per week (by millions)

Price of pizza

15 $3.00

20 $6.00

25 $9.00

30 $12.00

35 $15.00

--- $0.00

Quantity supplied of pizza per week (by millions)

Price of pizza

9 $3.00

14 $6.00

19 $9.00

25 $12.00

30 $15.00

--- $0.00

Original Story New Story

How would determinants of increased supply change the picture of supply?

S1

8 14 20 26 32Millions of pizzas per week

$15

12

9

6

3

0

Pri

ce p

er

piz

za

8 14 20 26 32Millions of pizzas per week

$15

12

9

6

3

0

Pri

ce p

er

piz

za

How would determinants of increased supply change the picture of supply?

S1S2